Four in ten people do not know how much money can be passed on inheritance tax free in the UK, new research from Zurich has found.

The “complex” inheritance tax system is baffling many Britons, who on average think that they are set to inherit £218,000 more than the reality. Those aged 25-34 believe that they will receive £358,020 more – higher than any other age group.

Three in ten people wrongly think that they can gift large sums of money to people on their birthday, while a fifth believe they can gift large sums to cover care costs without paying inheritance tax.

However, the survey of 2,000 people, carried out for the insurer by YouGov, also revealed that many people are unaware of the allowances that do allow them to gift money during their lifetime.

An annual tax gift allowance of £3,000 per person means that this sum can be given away by parents to their children each year. However, 84% of respondents had not heard of this allowance, just 6% had taken advantage of it and only 15% said they planned to use this in the future.

A review published in July by the Office for Tax Simplification has recommended that some of the fundamental aspects of inheritance should be made “simpler, more intuitive and easier to operate”. Its proposals include cutting down the current seven-year gifting rule to five years, and simplifying the link between inheritance tax and capital gains tax.

Zurich’s head of retail platform strategy, Alistair Wilson, commented: “Everyone wants to leave as much of their wealth as possible to their loved ones, but could be losing thousands by falling into the many traps. The rules are particularly complex, leaving people baffled as to what they can pass on, how, and when.

“The rules do need to be simplified, but better communication of the options available is also crucial to ensure future generations aren’t cut short. Speaking to a financial adviser can help identify the best financial strategy that won’t lead to the tax man at every turn.”

Share Story: